Fitch Rates AltaGas Ltd.'s Medium-Term Notes 'BBB'

(The following statement was released by the rating agency) Fitch Ratings-New York-25 November 2020: Fitch Ratings has assigned a 'BBB' rating to AltaGas (TSX:ALA) Ltd.'s issuance of unsecured notes. AltaGas' Issuer Default Rating (IDR) is 'BBB' with a Stable Rating Outlook. AltaGas' ratings consider uncertainty regarding the impact of the coronavirus on AltaGas' midstream and U.S. gas utility business. While future adverse rating actions due to the economic fallout from the virus cannot be ruled out, Fitch believes AltaGas is reasonably well-positioned to weather the economic effects of the virus within its current rating category. Key Rating Drivers Strategic U.S. Utility/Canadian Midstream Focus: AltaGas acquired WGL Holdings (WGLH) in July 2018, thereby meaningfully increasing the size and scope of its U.S. natural gas distribution business. As a result of the acquisition and subsequent growth, AltaGas increased the number of customers served to 1.7 million in 2019 across five jurisdictions, from 448,000 in Michigan and Alaska at YE 2018. Since taking the helm at the company, President and CEO Randall Crawford has articulated and implemented a strategy focused on measured expansion of its U.S. gas utility and Canadian midstream business in the Montney shale, while divesting noncore midstream, power and utility assets. Asset Rationalization/Deleveraging: In 2019, AltaGas sold its ownership interest in the Stonewall Gas Gathering System, its distributed generation assets and its ownership interest in the Central Penn Pipeline. Total 2019 proceeds from the assets sales approximated CAD2.2 billion, exceeding the company's targeted asset divestiture range of CAD1.5 billion-CAD2.0 billion and were used to reduce debt by approximately CAD3.0 billion in 2019. The 2019 asset rationalization and restructuring follows CAD3.8 billion of announced or completed divestitures in 2018 and a meaningful reduction in AltaGas' common dividend. On March 31, 2020, AltaGas closed on the sale of its 37% ownership interest in AltaGas Canada, Inc., resulting in cash proceeds of CAD369 million. Post-restructuring, Fitch expects AltaGas management to implement a more focused, strategic approach to capex. Low Risk Business Profile: Fitch expects the majority of future consolidated AltaGas EBITDA to be contributed by its U.S. gas utilities, with the vast majority of the remainder coming from its Canadian midstream operation. AltaGas' utility operations are expected to represent approximately 60% of normalized 2020 EBITDA and its midstream business 39%. AltaGas' diversified group of relatively low-risk U.S. gas distribution utilities serve 1.7 million customers in five states with generally credit-supportive economic regulation, customer growth of approximately 1% and significant potential rate base growth driven by infrastructure investment. The company's midstream operations are highly contracted or hedged, integrated assets that provide value to customers across the energy value chain in the prolific Montney shale play. Propane Export Terminal Completed: The Ridley Island Propane Export Terminal (RIPET), Canada's first marine propane export facility, was completed and placed into service in 2Q19. RIPET's first shipment to Asia departed the facility in May and two more followed in June. RIPET is able to ship propane to Japan in 10 days, compared with 25 days for propane shipped from alternative U.S. locations, while providing enhanced netbacks to producers. Fitch expects RIPET to ramp up volumes from 40,000 barrels per day (bbl/d) run rate in 2019 to 50,000 bbl/d around YE 2020. The export facility is expected to be a catalyst for further growth across AltaGas' Montney midstream business. AltaGas is exposed to price differentials between North American Indices and the Far East Index (FEI) for RIPET capacity that are not under tolling arrangements and expects to negotiate tolling agreements for the majority of the plant's output. Recently, approximately 90% of total expected 2020 RIPET volumes were hedged at approximately USD10.00/bbl FEI-Mt. Belvieu or under tolling arrangements. Approximately one-third of RIPET's 2020 propane export volume is contracted through under tolling arrangements. Management intends to manage RIPET so that a growing portion of its annual capacity will be under tolling contracts. Selective Midstream Expansion: AltaGas' strongly positioned midstream asset base in western Canada provides value to customers across the energy value chain. In addition to RIPET, AltaGas completed the 50 million cubic feet per day (mmcf/d) net Nig Creek Gas Plant in 3Q19. In 1Q20, AltaGas completed construction of the 198 mmcf/d Townsend 2B Expansion Project, and the 10,000 bbls/d North Pine Expansion Project and, the Northeast B.C. Pipeline Projects were completed and placed into commercial operation. These projects are expected to attract additional natural gas liquids to AltaGas' integrated system, increase utilization of AltaGas' existing liquids pipelines and provide additional propane for RIPET. Petrogas Investment: Fitch believes AltaGas Ltd .'s recent investment in Petrogas is a constructive development that it consistent with its strategic focus on Western Canadian midstream and Asian export markets for liquid petroleum gas. Management expects the transaction will be accretive to earnings and cash flows and close around year-end 2020. Under the terms of the transaction, AltaGas will expand its ownership interest in Petrogas to approximately 74% from 33%, paying CAD715 million, and assume operating oversight of the company. Idemitsu Kosan Co. Ltd. owns the remaining 26% stake. While AltaGas plans to fund the transaction with debt, Fitch believes the impact on projected credit ratios will be manageable within the current rating category. Petrogas operates the Ferndale export terminal, which ships liquid petroleum gas to Asian markets. Located in northwest Washington state, Ferndale is capable of handling up to 50,000 Bbls/day with 750,000 Bbls of on-site storage capacity. Petrogas also operates various North American storage terminals and its export and storage operations account for approximately 90% of EBITDA. Utility Rate Regulation: Fitch believes price regulation across AltaGas' combined local gas distribution service territories in the U.S. is generally constructive from a credit perspective, providing its local gas distribution utilities with a reasonable opportunity to earn their authorized returns on equity. Michigan and Virginia have adopted forward-looking test years and other credit-supportive regulatory practices. While Maryland has been a somewhat challenging jurisdiction historically, Fitch believes significant changes in the composition of the state utility commission and approval of WGL's 2019 base rate case settlement bode well for a more balanced regulatory environment from a credit perspective. In Fitch's opinion, rate regulation in the District of Columbia and Alaska tend to be somewhat more challenging. More favorably, cost-recovery mechanisms are in place for pipe replacement programs in Michigan, Virginia, Maryland and the District of Columbia. Infrastructure replacement capex designed to enhance system safety and reliability is uncontroversial and a key driver of AltaGas' utility capex program. While not currently anticipated, any meaningful deterioration in jurisdictional price regulation could trigger credit rating downgrades. Pending Rate Case Filings: In January 2020, AltaGas subsidiary Washington Gas Light Co. (WGL; A-/Stable) filed an application with the Public Service Commission of the District of Columbia (DCPSC) requesting an increase in base rates of USD35.2 million (14.7%). The rate increase request is based on a 10.4% authorized ROE and an equity component of regulatory capital of 52.24%. The requested rate increase includes USD9.1 million of DCPSC-approved revenue associated with distribution system upgrades collected through WGL's PROJECTpipes surcharge. A final decision in the rate proceeding is expected in the first half of 2021. WGL's filing also requests commission approval of its proposed Revenue Normalization Adjustment, a revenue decoupling mechanism similar to those in effect for WGL in Maryland and Virginia. In August 2020, WGL filed a rate case with the Public Service Commission of Maryland requesting a USD28 million rate increase. The filing includes USD6 million currently collected through WGL's Strategic Infrastructure Development Enhancement Plan surcharge to recover costs related to system upgrades. A final decision is expected by the end of 1Q21. Michigan Rate Case Decision: AltaGas' indirect utility operating subsidiary SEMCO Gas filed a request with the Michigan Public Service Commission (MPSC) for a base rate increase of USD38 million annually, based on a forecast 2020 test year. The request included recovery of SEMCO Gas' investment in the Marquette Connector Pipeline, which was completed in November 2019, and higher operating costs since its last base rate case in 2010. In December 2019, the PSC approved a settlement agreement reached by SEMCO Gas with intervenors and MPSC staff in November 2019. The MPSC-approved settlement authorizes a USD19.9 million rate increase based on a 9.87% allowed ROE and resolves tax benefit issues associated with the Tax Cuts and Jobs Act of 2017. Fitch believes MPSC approval of the settlement is a constructive development from a credit perspective. Under the terms of the settlement, SEMCO Gas agrees not to seek to increase general rates before Jan. 1, 2023. Focused Capex: Fitch expects AltaGas' future capex will primarily focus on its core utility and midstream segments. Capex in 2020 is expected to approximate CAD900 million (excluding Petrogas spend), 30% lower than 2019's CAD1.3 billion. The utility segment is expected to account for approximately 80% of total capex in 2020, with the remainder primarily targeting the midstream segment. The sharp yoy decline in capex reflects completion of RIPET and the Nig Creek gas plant in 2019. Utility spend is primarily driven by pipeline replacement programs in Virginia, Maryland, the District of Columbia and Michigan, system betterment and customer growth. In the midstream segment, 2020 capex is expected to be driven by several projects, including the Townsend and North Pine expansion projects and the B.C. Northeast pipelines projects. Rating Linkages: AltaGas and WGLH's ratings are equalized in accordance with Fitch criteria, reflecting close strategic, operational and legal linkages. Prior to the completion of its acquisition of WGLH, AltaGas generally funded its operating subsidiaries, with the exception of SEMCO, at the corporate parent and Fitch does not anticipate WGLH will access long-term debt capital markets directly. Fitch expects maturing WGLH debt will be refinanced at the AltaGas parent level as it matures. Due to strong ring fence provisions adopted at WGL as a condition of merger approval, Fitch rates the utility on a standalone basis, consistent with the agency's parent-subsidiary criteria. The ring-fence provisions are designed to preserve and protect WGL's standalone credit profile and WGL is expected to continue to directly access debt capital markets. Derivation Summary AltaGas Ltd., with total assets of approximately CAD20 billion 3Q20, is smaller than diversified peers CenterPoint Energy (NYSE:CNP), Inc. (CNP; BBB/Negative), Dominion Energy, Inc. (DEI; BBB+/Stable) and TC Energy Corp., formerly known as TransCanada (A-/Negative), which have total assets of CAD43 billion, CAD137 billion (both based on an exchange rate of 1.3105 per U.S. dollar, and CAD102 billion, respectively. CNP, DEI and TC Energy are large, diversified energy companies with significant, regulated and unregulated operations, including large midstream operations. While smaller in size, AltaGas has a diversified assets base comprised primarily of U.S. utility and Canadian midstream operations. Like CNP and Dominion, AltaGas' operations include significant, low risk, gas utility operations. Both CNP and AltaGas' utility operations are well diversified, serving parts of eight and five states in the U.S., respectively. AltaGas', through WGL, serves affluent populations in parts of Virginia, Maryland and D.C. with prospective customer growth estimated at 1 percent per year. CNP and DEI, unlike AltaGas, also have meaningful electric utility operations. TC Energy's diverse operating base encompasses a wide-range of regulated and highly contracted unregulated assets that span the energy value chain across North America, including Mexico. Fitch believes AltaGas' competitive profile in the midstream is weaker than TC Energy's. However, in Fitch's view, AltaGas has carved out a reasonably competitive, highly contracted, integrated business in Western Canada's Montney shale formation that includes gathering, processing, extraction, fractionation and transportation of natural gas and natural gas liquids and highly competitive export capabilities to Asian markets. Key Assumptions Fitch's Key Assumptions Within the Rating Case for the Issuer --Continuation of reasonable economic regulation across AltaGas' jurisdictional service territory; --Compound annual customer growth of 1% at AltaGas' U.S. gas utility segment on average; --RIPET achieves a 50,000 bbl/d annual run rate around YE 2020; --WGL sales decline of 1% due to the impact of the coronavirus. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: --Continuation of credit-supportive regulatory trends and better than expected final decisions at AltaGas' U.S. utility subsidiaries compared to Fitch's base rating case; --Stronger than expected performance at AltaGas' Canadian midstream businesses; --Sustained FFO-adjusted leverage of 4.5x or better on a consistent basis. Factors that could, individually or collectively, lead to negative rating action/downgrade: --Significant deterioration in regulatory environments across AltaGas' jurisdictional service territory; --Greater than expected impact on utility and midstream operations due to coronavirus effects; --Unexpected delay to capacity expansion targets at RIPET; --Material delays and cost overruns associated with the construction of the Mountain Valley Pipeline project; --FFO-adjusted leverage above 5.5x on a sustained basis. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure In Fitch's opinion, AltaGas Ltd.'s liquidity is adequate. AltaGas has negotiated consolidated credit facilities with total borrowing capacity of CAD4.9 billion. As of Sept. 30, 2020, AltaGas had drawn CAD999 million and had remaining borrowing capacity of CAD3.9 billion. AltaGas had cash and cash equivalents of CAD29 million on its balance sheet as of Sept. 30, 2020. Summary of Financial Adjustments Fitch provides equity credit for AltaGas preferred stock consistent with our hybrid criteria. Date of Relevant Committee 02 April 2020 REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg AltaGas Ltd. ----senior unsecured; Long Term Rating; New Rating; BBB Contacts: Primary Rating Analyst Philip Smyth, CFA Senior Director +1 212 908 0531 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Rating Analyst Kathleen Connelly, Director +1 212 908 0290 Committee Chairperson Shalini Mahajan, CFA Managing Director +1 212 908 0351 Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1 (https://www.fitchratings.com/site/re/973270)) Additional Disclosures Solicitation Status (https://www.fitchratings.com/site/pr/10143928#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10143928#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10143928#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT (https://www.fitchratings.com/rating-definitions-document) DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY (https://www.fitchratings.com/site/regulatory). FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.